Sunday, October 19, 2014

LsC & BPO Trade Finance and Payments

For the life of me I cannot tell the difference between a Letter of Credit and a Bank Payment Obligation, The New Thing in trade finance.  Here JP Morgan explains...  The ICC, a private law entity which promulgates rules and regs for banking, has this to say...

The "mismatch acceptance" is noted, and therein is the nonsense of banks selling letters of credit as security in international trade.  Some 80% of letters of credit fail, and the buyer "accepts the exceptions."  Here the banks refer to the buyer "accepts the mismatch."  With an LC, we always did, since we knew our suppliers, so a difference in terminology fails to signify new.  Credit risk mitigation starts and ends with relationship between buyer and seller, there is nothing the bank can contribute to amelioration, since neither by policy or law will they take responsibility to payment or delivery failure.

The BPO does seem to be limited to what is known as a confirmed letter of credit, the highest grade of letter of credit.

I suspect the fact they are introducing defined electronic data sets to be matched by computers, rather than humans checking paperwork, will on the one hand reduce the errors of input, but on the other hand increase the accuracy of checking for document compliance.  I'd expect a net improvement in matching documents to terms.

I can see how switching from humans checking paperwork (I got to the point of being able to tell the native language of the clerk who did the checking by the check marks made) might increase efficiency and lower cost, but the requirement of underlying assets has not changed in the least.  And I wonder with the lower costs, if there will be a lowering of fees, I expect not, since we are talking banks.

Banks take an abundance of caution when extending lines of credit to customers, and there is I am sure nothing new with the BPO.  But who knows?  Credit is being created at a breathtaking pace, banks are not lending it very fast, and given that nothing regarding the BPO seems to be new, perhaps the "new" is just a lowering of credit standards, that is to say, the banks are no longer taking an abundance of caution, and this is all "standby LC" grade credit being lent.   A good masters thesis would be to study the BPO on this point.

The FEDS are jumping back in with both feet right now pushing subprime loans to the masses, again lowering standards, to bring back the good old days that resulted in the 2008 bust... and so we can expect that bad ideas are being pushed.

Right now the BPO is optional, I see a time coming when it is mandatory.

Another generation will no longer how to process a manual transaction Letter of Credit transactions.  What to do when a virus brings down the electronic clearance systems?

I recall in the 1980s when the power went out, stores continued to sell and ring up customers.  They did manually.  Imprinted credit card transactions.  Cash till transactions...  business went on.  Now they have to shooo customers out and lock the doors.

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